Fed’s Mester sees more rate hikes later in 2018, in 2019

The US Federal Reserve (Fed) should continue raising interest rates this year and next so that it can avoid overheating which would cut short economic expansion that is already picking up steam, according to a policymaker at the US central bank.

Cleveland Fed President Loretta Mester, who leans somewhat hawkish, said on Tuesday that the central bank can speed or slow its “gradual” policy tightening if, for example, recently announced US tariffs on imports lead to a trade war that hits the economy.

Mester was among Fed policymakers who voted unanimously last week to raise rates by a quarter of a percentage point.

“If the economy evolves as I anticipate, I believe further gradual increases in interest rates will be appropriate this year and next year,” Mester said during a speech at Princeton University.

The Fed must “avoid a build-up in risks to macroeconomic stability that could arise if the economy were allowed to overheat,” she added.

Mester – who earlier this year was being considered by the White House as the Fed’s vice chair – sketched out a policy approach for the next couple of years that appeared to be a bit more aggressive compared to her colleagues, while for 2020, her approach appears to be less aggressive.

Last week, the central bank lifted its expected policy path in a nod to large tax cuts and government spending and expectations that inflation should soon rise above a 2 percent target after years below it.

Median forecasts see three more rate hikes this year and next, and two more in 2020.